Yield farming is not simple. The strategies that yield that most returns are very complex and recommended only for advanced users. Also, yield farming is normally more suitable for people with huge capital to invest (i.e., whales).
Contrary to what it might look like, yield farming is quite difficult, and you are likely to lose money if you lack the understanding needed. So, apart from your collateral being liquidated, what other risks should you know of?
One clear risk of yield farming is smart contracts. As a result of the way DeFi is structured, many of the protocols are developed and built by nominal teams with restricted budgets, thereby increasing the likelihood of smart contract bugs.
And even in cases of larger protocols audited by recognized firms, bugs and vulnerabilities are found regularly. Due to blockchain’s immutability, user funds may be lost here. This must be considered when investing in smart contracts. In addition, DeFi’s biggest advantage also poses its greatest threat – the concept of composability on yield farming.
As earlier discussed, DeFi protocols do not require permissions and can be integrated seamlessly with each other. In other words, the whole DeFi system relies heavily on all of its building blocks. That is what the composability of these applications is really about – the ease at which they work together.
Why is this risky? Since the whole system depends on every building block, one’s failure may affect it all. This single threat affects liquidity pools and yield farmers in turn. Trusting your funded protocol isn’t the only thing you need to worry about, but all the others it depends on as well.
